Income Taxes and Accounting for Uncertainty in Income Taxes

12 Months Ended

Dec. 31, 2020

Income Taxes and Accounting for Uncertainty in Income Taxes

Income Taxes and Accounting for Uncertainty in Income Taxes

12.    Income Taxes and Accounting for Uncertainty in Income Taxes

Income Taxes

Our income tax policy is to record the estimated future tax effects of temporary differences between the tax bases of assets and liabilities and amounts reported on our Consolidated Balance Sheets, as well as probable operating loss, tax credit and other carryforwards. Deferred tax assets are offset by valuation allowances when we believe it is more likely than not that net deferred tax assets will not be realized. We periodically evaluate our need for a valuation allowance. Determining necessary valuation allowances requires us to make assessments about historical financial information as well as the timing of future events, including the probability of expected future taxable income and available tax planning opportunities.

We file consolidated tax returns in the United States. The income taxes of domestic and foreign subsidiaries not included in the United States tax group are presented in our consolidated financial statements on a separate return basis for each tax paying entity.

As of December 31, 2020, we had $2 million net operating loss carryforwards (“NOLs”) for federal income tax purposes and $127 million of NOL carryforwards for state income tax purposes, which are partially offset by a valuation allowance. In addition, there are $71 million of tax benefits related to credit carryforwards which are partially offset by a valuation allowance. Portions of the state NOL and credit carryforwards expired in 2020.

The components of the (benefit from) provision for income taxes were as follows:

	For the Years Ended December 31,
	2020		2019		2018
	(In thousands)
Current (benefit) provision:
Federal	$	(230,935)	$	173,326	$	44,451
State		22,566		43,579		29,918
Foreign		7,471		6,203		4,616
Total current (benefit) provision		(200,898)		223,108		78,985
Deferred (benefit) provision:
Federal		610,528		204,403		383,096
State		243,216		21,732		64,000
Increase (decrease) in valuation allowance		45,429		2,115		7,603
Total deferred (benefit) provision		899,173		228,250		454,699
Total (benefit) provision	$	698,275	$	451,358	$	533,684

Our $2.572 billion of “Income (loss) before income taxes” on our Consolidated Statements of Operations and Comprehensive Income (Loss) included income of $18 million related to our foreign operations.

The following table shows the principal reasons for the difference between the effective income tax rate and the statutory federal tax rate:

	For the Years Ended December 31,
	2020	2019	2018
	% of pre-tax income/(loss)
Statutory rate	21.0	21.0	21.0
State income taxes, net of federal benefit	4.6	3.2	4.6
State apportionment changes	5.4	—	—
Cares Act NOL Carryback	(2.3)	—	—
Other, net	(1.6)	(1.0)	(1.2)
Total (benefit) provision for income taxes	27.1	23.2	24.4

Deferred taxes arise because of the differences in the book and tax bases of certain assets and liabilities. Significant components of deferred tax assets and liabilities were as follows:

	As of December 31,
	2020		2019
	(In thousands)
Deferred tax assets:
NOL, interest, credit and other carryforwards	$	128,968	$	368,545
Accrued and prepaid expenses		—		8,488
Stock-based compensation		17,962		19,821
Unrealized (gains) losses on available for sale and other investments		9,862		4,137
Deferred revenue		26,977		17,238
Total deferred tax assets		183,769		418,229
Valuation allowance		(73,788)		(28,359)
Deferred tax asset after valuation allowance		109,981		389,870
Deferred tax liabilities:
Depreciation		(467,922)		(583,374)
Accrued and prepaid expenses		(72,314)		—
FCC authorizations and other intangible amortization		(2,542,887)		(2,040,885)
Bases difference in partnerships and cost method investments (1)		(744,911)		(573,548)
Discount on convertible notes and convertible note hedge transaction, net		(151,517)		(62,718)
Total deferred tax liabilities		(3,979,551)		(3,260,525)
Net deferred tax asset (liability)	$	(3,869,570)	$	(2,870,655)

(1) Included in this line item are deferred taxes related to, among other things, our non-controlling investments in Northstar Spectrum and SNR HoldCo, including deferred taxes created by the tax amortization of the Northstar Licenses and SNR Licenses.

Accounting for Uncertainty in Income Taxes

In addition to filing federal income tax returns, we and one or more of our subsidiaries file income tax returns in all states that impose an income tax and a small number of foreign jurisdictions where we have immaterial operations. We are subject to United States federal, state and local income tax examinations by tax authorities for the years beginning in 2008 due to the carryover of previously incurred NOLs. We are currently under a federal income tax examination for fiscal years 2008 through 2016.

A reconciliation of the beginning and ending amount of unrecognized tax benefits included in “Long-term deferred revenue and other long-term liabilities” on our Consolidated Balance Sheets was as follows:

	For the Years Ended December 31,
Unrecognized tax benefit	2020		2019		2018
	(In thousands)
Balance as of beginning of period	$	674,207	$	385,394	$	393,916
Additions based on tax positions related to the current year		233		244,257		10,350
Additions based on tax positions related to prior years		1,999		61,909		1,670
Reductions based on tax positions related to prior years		(296,265)		(13,028)		(6,291)
Reductions based on tax positions related to settlements with taxing authorities		(831)		(2,362)		(8,328)
Reductions based on tax positions related to the lapse of the statute of limitations		(876)		(1,963)		(5,923)
Balance as of end of period	$	378,467	$	674,207	$	385,394

We have $351 million in unrecognized tax benefits that, if recognized, could favorably affect our effective tax rate. We do not expect any material portion of this amount to be paid or settled within the next twelve months. During the year ended December 31, 2019, we recorded $274 million of additional uncertain tax benefits related to a tax position for certain provisions of the Tax Reform Act. As of December 31, 2020, these amounts were reversed as new Federal Tax Regulations released in 2020 resolved these uncertainties. The position relates to a timing difference and resolution with respect to the position did not impact our effective tax rate. Accrued interest and penalties on uncertain tax positions are recorded as a component of “Interest expense, net of amounts capitalized” and “Other, net,” respectively, on our Consolidated Statements of Operations and Comprehensive Income (Loss). During the years ended December 31, 2020, 2019 and 2018, we recorded $13 million, $22 million and $13 million in net interest and penalty expense to earnings, respectively. Accrued interest and penalties were $88 million and $75 million at December 31, 2020 and 2019, respectively. The above table excludes these amounts.